Deck 20: Investment Decisions

Question 1

The following data is relevant for Questions 6 to 11. Year Cash Flow 1 Cash Flow 2 Cash Flow 3 0 (1500) (500) 1 1,300 200 2 650 200 3 900 200 4 2,700 200 5 200 200 6 200 200 7 200 Discount rate is 10% Determine the NPV of the project under the heading Cash Flows 1 above. The NPV is:

A) +2,739
B) + 3,456
C) + 2109
D) + 2,793

Answer 1

A

Question 2

Sivraj Limited is planning to invest £250000 in a machine. A policy of straight line depreciation will be applied. Determine the ARR. Where the definition of ARR is: Average Profits / Initial Investment x 100 Cash flows arising from the investment, before taking depreciation into account, are estimated as follows: Year 1 £95000 Year 2 £116000 Year 3 £107000 Year 4 £84000 What is the accounting rate of return on this investment (to one decimal place)?

A) 19.3%
B) 15.5%
C) 24.0%
D) 20.2%

Answer 2

D

Question 3

Determine the NPV for the project described as Cash Flow 3 above using annuity tables . The NPV is:

A) 650
B) 520
C) 320
D) 340

Answer 3

D

Question 4

The present value of £5609 receivable at the end of year 5 assuming a 10% discount rate is equal to (to the nearest £):

A) £3102
B) £5643
C) £3483
D) £3678

Question 5

Calculate the discounted payback in Cash Flow 1 above

A) 2.1 years
B) 1.1 years
C) 1.3 years
D) 1.6 years

Question 6

If the NPV of a project is +£6000 this means that the vale of the firm will increase by £6000 if the project is accepted.

Question 7

There are several definitions of the accounting rate of return.

Question 8

Of the investment decision appraisal methods listed which will determine a discount rate which applied to cash flows will produce a net present value of zero?

A) Accounting rate of return
B) Payback
C) Internal rate of return
D) Discounted payback

Question 9

The internal rate of return method of investment appraisal takes no account of the time value of money.

Question 10

Which of the following formulae will calculate the present value of £100 received in one year's 1 time?

A) £100 (1 +r)
B) £100/(1+r)
C) £100 (1+r)2
D) £100/(1+r)2

Question 11

Maximize sales revenue is the objective underpinning the NPV method of investment appraisal.

Question 12

Determine the NPV for the project described as Cash Flow 2 above using the annuity Tables. The NPV is:

A) + 450
B) + 371
C) + 340
D) + 402

Question 13

Profits not cash flows are used in the payback method.

Question 14

Calculate the pay back in Cash Flow 1 above

A) 2.6 years
B) 1.3 years
C) 1.5 years
D) 1.1 years

Question 15

What is the Internal Rate of Return using the data in Cash Flows 3 above with the exception that the initial investment in Year 0 is £700

A) 13.90%
B) 16.76%
C) 15.09%
D) 15.59%

Question 16

The managers of Coyle Ltd are currently assessing a potential new product which will require a significant capital investment. In the process they have employed consultants to assess the market for the product. Which of the following statements are correct? For investment appraisal decisions the expenditure on market research is categorized as:

A) Opportunity cost
B) Sunk cost
C) Avoidable cost
D) Unavoidable cost

Question 17

A perpetuity is a cash flow which is expected to continue to last indefinitely.

Question 18

The discount factor for an investment for 5 years at 12% is (to 3 decimal places):

A) 0.6355
B) 0.5428
C) 0.5066
D) 0.5674

Question 19

The following net present values have been calculated at a range of interest rates for a project: Interest rate NPV £ 12% 16 227 14% 9 400 16% 2 240 18% (5 957) Using linear interpolation, what is the best estimate of the internal rate of return of this project (calculated to two decimal places)?

A) 16.55%
B) 17.0%
C) 17.45%
D) 17.21%

Question 20

Discounting is compounding in reverse.